Fmr. Fed Governor Mishkin: Fed got it right this time

Discussing the Federal Reserve's decision to begin the taper, with Frederic Mishkin, former Federal Reserve governor, and David Malpass. Encima Global president.

Did the Federal Reserve finally get the taper right? Former New York Fed Governor Frederic Mishkin says yes.

The U.S. central bank announced Wednesday it would start tapering its bond-buying program by $10 billion to $75 billion a month. The move came as a surprise to some investors but reflected signs of confidence in an improving economy. Both the Dow and the S&P 500 surged to record-high levels in response to the news, with the Dow adding almost 300 points on the day.

"This is a very good outcome," Mishkin said on CNBC's "The Kudlow Report." "They basically decreased uncertainty. They also made it very clear that tapering does not mean a tightening of policy."

Federal Reserve Chairman Ben Bernanke emphasized the Fed's commitment to keeping interest rates low, saying he expected it would be "some time" before all variables in the labor market are strong enough to withstand an increase in rates.

"I think that the real issue here is that they got it right this time, and I think that's what people are reacting to," Mishkin said. "There was a problem in September where I would have preferred that they actually taper then with, again, very dovish expansionary policy in terms of forward guidance. They blinked because they were very concerned about what was going on in the markets."

Many of the headwinds driving the Fed's hesitation to taper in September, particularly a budget deal in Congress, have now come together, Mishkin said.

"The problem here is not that the Fed can't get growth growing," Mishkin said. "We have all these things that have been headwinds that have created problems."

The Former Fed Governor added that Federal Reserve, under Fed Chairman Nominee Janet Yellen, will focus committee on controlling inflation, which he sees as too low.

"With this Fed, and in particular Janet is someone who would want to pursue this, you want to push the envelope," he said. "We feel that the natural rate of employment might be lower than expected. We see inflation being lower than expected."

Ultimately, Mishkin said, the Fed's $10 billion taper decision was a turning point in the Fed's policy tools.

"This was actually a critical juncture for the Fed," Mishkin said. "Very clearly they want to differentiate between the two tools of monetary policy that are being used right now. One of the asset purchase program and the second is the management of expectations, or what we call forward guidance."